What makes up the price of a litre of petrol?
The cost of filling the average car with fuel is falling. Here’s what makes up the price of a litre of petrol.
The price of a litre of petrol is made up of multiple parts.
In its most basic sense, petrol is made out of oil and, therefore, petrol prices are closely linked to oil prices (high commodity prices are one of the main reasons why inflation has jumped over the past year).
However, there's also the cost of turning oil into petrol (refining the product) and transporting it around the world. Then there's the cost of biofuel additives, taxes and the retailer's profit margin.
With all these factors to consider you might be wondering exactly what makes up the price of a litre of petrol and how global events can influence what you pay at the pump (as well as drive inflation).
How the price of a litre of petrol is determined
Ultimately, the price of a litre of petrol is determined by oil prices as without oil, you can’t make petrol.
There are many different types of oil, some of which are easier to refine into petrol and diesel than others. The price of oil depends on different factors, including the strength of the pound.
You see oil products are generally traded on the global market in dollars, which means that if either the dollar strengthens or the pound weakens, oil becomes more expensive for consumers here in the UK.
This is one of the reasons why the price of a litre of petrol has jumped so much over the past year. The value of the pound has fallen against the dollar by around 10% over the past 12 months, making dollar imports 10% more expensive.
The weak pound was not the only factor that drove petrol prices higher in 2022. Russia's invasion of Ukraine sent oil prices skyrocketing in the first half of the year, although they moderated in the second half as fears of a global recession and subsequent drop in demand for hydrocarbon products took hold.
Yet sterling’s sharp depreciation prevented UK consumers from feeling the full impact of lower oil prices.
“The influence of the exchange rate is often overlooked when drivers compare oil price movements with those at the pump. At the moment, it is critical. Oil and fuel on commodity markets are traded in dollars, which makes the weaker pound very bad news for motorists,” AA’s fuel price spokesperson said.
This has been compounded by the actions of fuel retailers, according to the RAC.
It described December as a “rotten month” for drivers who it claims are being overcharged by as much as £5 million a day for petrol.
Simon Williams, fuel spokesman for the RAC, said: “December was a rotten month for drivers as they were taken advantage of by retailers who rewrote their pump price strategy, costing motorists millions of pounds as a result.
“Their resistance to cutting prices and to only pass on a fraction of the savings they were making from lower wholesale costs is nothing short of scandalous.”
According to the RAC figures, wholesale petrol prices have dropped around 25% from their June peak, while prices at the pump have dropped just 21%.
Petrol prices could continue falling
The good news for consumers is the fact that petrol prices could continue falling.
Oil prices have fallen to levels not seen since the end of 2021 in recent weeks. Meanwhile, the pound has strengthened by around 13% from its multi-decade low printed in late September after Lizz Truss’s disastrous mini-budget.
At the same time, retailers are finally starting to pass on some of the drop in wholesale costs to consumers.
In December, supermarket giant ASDA slashed 4.5p per litre off the price of petrol across its forecourts. The average cost of petrol across the country has now dropped below 150p per litre, around the same level it was before Russia's invasion of Ukraine.
This drop is already saving consumers a huge sum.
Luke Bosdet, the AA's spokesman on pump prices, said: "A 41.8p-a-litre crash in the average pump price of petrol is a huge relief for drivers, cutting £22.99 from the cost of filling the typical car tank (55 litres).
As some sort of stability returns to global oil markets, the price of a litre of petrol could continue to decline.
What makes up the price of a litre of petrol?
The price that you pay at the pump for a litre of petrol is made up of six distinct components.
• Fuel duty
Fuel duty, or the tax that we pay for our fuel, is currently set at 52.95p a litre, represents roughly 35% of a litre of petrol.
• Wholesale costs
The cost of wholesale petrol to the supplier is the second biggest component – accounting for roughly 29% according to analysis by the RAC – and is based on the price of raw materials including crude oil and refining costs.
The price that we pay for our petrol at the pump largely moves in line with oil prices, and they can be very volatile.
On top of fuel duty, drivers also pay VAT at a rate of 20% on the petrol they buy. As a result, when the price of fuel increases, so too does the amount of VAT that you pay. It represents around 17% of the price of a litre of petrol.
• Retailer Profit
The amount retailers receive from the sale of every litre is around 13%, according to the RAC.
• Delivery and distribution
The cost of distributing and transporting the fuel is passed onto drivers and represents around 1% of the total cost.
• Biofuel content
Finally, there is the biofuel content. According to the RAC, the biofuel content accounts for around 5% of the price of a single litre of petrol today.